Pandora Media Inc: It’s Make-or-Break Time for P Stock

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The time for Pandora Media Inc (P) to make a turnaround is at hand, but it won’t be for long. If Pandora strikes while the iron is hot and leverages its strengths, it will be a game changer for the company and its stock. But the company must act quickly.

P stockPandora is not a streaming service, per se; that is, you can’t choose your own songs. Rather, the company is akin to a digital radio service that lets you customize your own “radio channels.” But there’s more going for Pandora than just that. It has a unique edge they call the “Music Genome Project.”

How that works is that Pandora identifies your tastes and likes and creates a musical formula from that. Based on your formula, you will hear new songs or new artists that are particularly suited to you.

Now, that is a very cool function.

But just like any other radio station, Pandora gets most of its revenues from commercials. Thus far, revenues have been growing at a healthy clip of 54% on a 5-year average. But revenue generation has really never been an issue for P stock.

Pandora’s issues are more complicated than that. In fact, the digital radio company has not one, but two life-threatening problems that it has to solve.

Royalty payments: Pandora’s rather hefty royalty payments for music are eating 65% of its total revenues. In comparison, rough estimates suggest, Apple Inc. (AAPL) pays roughly 58% for direct streaming. Pandora is losing more and more money each year so it’s no wonder that the company is in the red. To stop this hemorrhaging, it must renegotiate its royalty deals.

Apple Music: Apple’s music streaming business is, without argument, Pandora’s biggest threat. Since Apple launched Apple Music back in June 2015, it has grown quickly. In fact, less than a year later, Apple music is already half the size of Spotify. To make things worse, Apple also offers the Apple radio service which competes head-to-head with Pandora.

If Pandora does not start providing a streaming service, along with its radio service, it could very quickly see its users migrate to Apple. Because, let’s face it, if you have Apple music and Apple radio combined, would you continue using Pandora, just for the radio?

The answer, most likely, is no.

Pandora Has a Wild Card

On the plus side of the equation, Pandora has a massive user base of 81 million active listeners, which is creeping more and more closely to Spotify’s 100 million.

Regardless, in order for it to change the game, it must do two things: First, it has to finalize its negotiations for licensing streaming music (which will allow it to compete with Apple). Second, it must renegotiate its existing royalty deals for its radio service.

But even so, the company does have a wild card up its proverbial sleeve.

It’s in the music industry’s best interests to let Pandora survive rather than allow Apple to monopolize the sector. But it will have to act quickly, while it still has 81 million users to use as leverage.

The Bottom Line

At the moment, Pandora’s market capitalization is $2.03 billion against annual revenues of $1 billion. How much could P stock really be worth? That’s hard to say, since its peers don’t reveal their earnings.

But there’s hope for Pandora. Considering that P stock has plunged more than 40% over the last year, if Pandora plays its cards right and starts turning profitable, I’d venture to say it could be worth much, much more.

But if Pandora fails to act quickly? Then it’s checkmate for the digital radio company and game over for P stock.

Make or break, it’s going to be an interesting year for Pandora and one you don’t want to miss.

As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/pandora-make-or-break-p-stock-crossroads/.

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